Herding cats is a notoriously difficult task, but Janet Yellen served notice on Tuesday that no matter what emanates from other members of the US monetary politburo, there’s only one house view and that’s her’s. “As she spoke, I couldn’t help picturing a mother lion swatting her misbehaving cubs back into line,” Bloomberg’s Richard Breslow wrote this morning.
While there’s something disturbing about picturing the “diminutive” Fed chair as a “mother lion,” the analogy seems apt.
“[There was] a lot of ‘let’s not forget the far more hawkish statements other Fed officials made last week,’ [but] this was not a bolt out of the blue,” Breslow continues, noting that Yellen’s speech at the New York Economic Club “was the third dovish announcement in a matter of weeks: by the boss.”
Indeed. The biggest “boss” of them all has spoken, and this is one “mother lion” who was intent on playing the dove in March. And that’s great news for EM FX, which just had its best run in 18 years. “Developing currencies rallied in March by the most since 1998, with commodity exporters Russia and Brazil enjoying the biggest gains,” Bloomberg writes. “As an index of stocks covering developing countries headed for the best month since October 2011, Fed Chair Janet Yellen gave the rally a boost overnight by giving the strongest indication yet that she will go slow with rate increases.” Bloomberg’s dollar index is down 3.7% this month – its second consecutive monthly decline and the biggest drop in more than four and a half years.
Here’s what we wrote earlier this morning:
“Starting March 18, the Bloomberg Dollar Spot had risen as much as 1.9% as Fed officials including Lacker, Williams and Bullard noted upside risks on rate-hike projection and suggested a rate hike may be imminent as soon as April. And then Yellen unleashed the latest round of dovishness, when she made it very clear that the Fed is no longer just the U.S. central bank, but that of the world (and mostly China) and as such its prerogative is to not only keep stocks high, but to also assure there is no currency crisis in Beijing (where a month ago she met other G-20 central bankers to decide precisely this). The result of Yellen’s much discussed speech, was an immediate plunge in the Dollar spot index of 1.2% to 8 month lows, its worst month in 5 years, a drop which has continued this morning, and is on par to equal the dollar’s tumble from the first week of March when Bill Dudley likewise came out very dovish, and when the index dropped 1.7% within a week.”
“Emerging-market currencies rallied during March mainly due to a dovish Fed statement, which undermined the USD,” said Khoon Goh, a Singapore-based FX strategist at Australia & New Zealand Banking Group. There was a time when EM was stuck in a kind of lose-lose scenario vis-a-vis the FOMC. Liftoff was bad because it presaged USD strength and thus accelerated capital outflows, but the longer the Fed waited to start hiking the more nervous the EM world became. For now anyway, the emerging world seems to have found a happy medium wherein the Fed has gotten the first hike out of the way, but is now set to prove that when the Committee says “gradual,” they really mean it.
But it’s not clear that Yellen is entirely pleased with the predicament she’s put herself in by effectively transforming the Eccles Building into the headquarters of what is now the Federal Reserve Bank of the World. “At February’s G-20 meeting, Yellen most assuredly heard some pretty undiplomatic language behind closed doors on her broader responsibilities [and] it wasn’t like the joy of a bank executive to learn she is now global rather than just U.S. head,” Breslow goes on to write, before asking if we “remember the photo-op picture at the end of the meeting when everyone but [Yellen] was smiling.”
Yes Richard, in fact we do remember that and much like a similar snapshot taken last year, we found it quite amusing:
As for the rally in EM currencies, we would note that there’s a very real possibility it will be short-lived. After all, part of the strength stems from higher commodity prices and that, in turn, is linked to the market’s (likely mistaken) assumption that next month’s meeting in Doha is actually going to yield some kind of concrete set of measures designed to change the exceptionally bearish fundamental backdrop that’s kept a lid on crude since the Saudis executed the petrodollar in November of 2014. Hopes for a (farcical) output freeze have combined with the weak dollar to give crude a boost, even as the rally now looks set to dissipate quickly.
Additionally, not everyone is buying the dovish overtones. Goldman, for instance, is hell bent on insisting that economic realities in the US will make it all but impossible for the Fed to hold off much longer on the nascent tightening cycle. Tune in on Friday to see if the BLS will give the Fed’s “mother lion” another excuse to stay dovish, or whether they’ll goalseek an upside surprise to perpetuate the illusion that the US labor market is still “robust.”
Then again, it doesn’t really matter. Even if the US economy added 500,000 jobs in March all it would take is one 8% selloff on the SHCOMP for “data dependent” Janet to get cold feet – or cold “paws,” as it were.
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